|Focus:||Gigi Entertainment Pty Ltd v Schmidt  NSWCA 287|
|Services:||Dispute Resolution & Litigation, Property & Projects|
Prudent landlords will include a provision in their leases allowing them to recover "loss of bargain damages" where the lease is terminated early as a result of the tenant's default. The recent decision of the NSW Court of Appeal in Gigi Entertainment Pty Ltd v Schmidt  NSWCA 287 illustrates that a landlord who seeks to enforce such a provision must have the requisite evidence to prove its claim for loss of bargain damages.
In that case the landlord's failure to produce any evidence of attempts to re-let the premises, or the actual rental value of the premises, proved fatal to the landlord's claim for loss of bargain damages.
Gigi Entertainment Pty Ltd (Gigi) was the owner of a hotel in Lithgow, which it leased to Mr Schmidt. The lease was due to expire on 3 July 2010. The obligation to pay rent was an essential term of the lease and a breach of the term would constitute a fundamental breach.
Mr Schmidt fell into arrears and Gigi, in accordance with its rights under the lease, terminated the lease and took possession of the premises in February 2008.
Upon taking possession, Gigi carried on the hotel business and continued to do so until July 2010 when it commenced proceedings against Mr Schmidt for loss of bargain damages.
Proceedings at first instance
Gigi relied upon expert evidence from an accountant who calculated Gigi's loss by reference to the rent and outgoings that would have been payable had the lease not been terminated, taking into account the "profits" derived by Gigi from its operation of the hotel since taking possession. As it happened, Gigi actually operated the hotel at a loss.
Mr Schmidt accepted that Gigi was entitled to terminate the lease and take possession and, if it chose to do so, operate the business. However Mr Schmidt argued that Gigi had not proved its loss of bargain claim and that the expert accountant's evidence was not admissible because it was not relevant to issues in the proceedings.
Mr Schmidt argued that the correct measure of damages for loss of a bargain was:
- the rent that the tenant would have been liable to pay the landlord had the lease not been terminated early, less
- the rent capable of being earned by re-letting the premises.
As Gigi had no evidence of the rent capable of being earned from re-letting the premises, Mr Schmidt argued that Gigi's claim for loss of bargain damages must fail.
The trial judge found in favour of Mr Schmidt and rejected Gigi's expert evidence. In making her decision, the trial judge noted that Gigi's approach rested on an irrelevant consideration, namely, its ability or success in operating the hotel business.
Her Honour held that Gigi was entitled to mitigate its loss by operating the business itself but, having done so, was not also entitled to recover damages from Mr Schmidt, calculated without regard to the amount the property could have been rented for in the marketplace.
The Court of Appeal upheld the trial judge's findings.
The primary authority relied on by Mr Schmidt on appeal was Gumland Property Holdings Pty Limited v Duffy Bros Fruit Market (Campbelltown) Pty Limited  HCA 10 which is authority for the principle that, if a landlord obtains possession due to the tenant's default, the landlord can only recover loss of bargain damages if it has tried unsuccessfully to obtain a new tenant at the rent stipulated in the terminated lease, and the need for a landlord to recover loss of bargain damages from a tenant only arises when the market is falling.
Gigi accepted that, as a starting point, the ordinary measure of loss of bargain damages for repudiation or breach of an essential term of a lease involves consideration of the market value of the lease at the time of its termination. However, Gigi maintained that there were special circumstances in this case which warranted a departure from the ordinary measure of damages and that its losses should be measured by reference to the profits (ie the actual loss), which arose from operating the hotel business.
Those special circumstances included that the lease contemplated that the landlord would carry on the business in its own right following termination of the lease, and it provided for the transfer to the landlord of the hotel licence, gaming entitlements and business name associated with the hotel.
The Court pointed out that Gigi was not obliged to assume the conduct of the hotel business on termination of the lease. In fact, the lease also contemplated that Gigi might appoint another licensee to conduct the hotel. On termination the landlord was placed in a position either to take up the operation of the business itself or to re-lease the premises to another licensee to do so.
There was no evidence put before the Court that Gigi's position was that it had no option but to operate the business, and there was no evidence that Gigi had attempted to re-let the premises.
Gigi also attempted to rely on the decision in Luxer Holdings Pty Ltd v Glentham Pty Ltd  WASCA 209 which held that the measure of damages recoverable by a landlord of commercial premises is the total rent and outgoings that would otherwise have been payable after termination, less any amount the landlord has obtained as profits from the use of the premises.
However, the Court distinguished the decision in Luxer Holdings by noting that the landlord in that case had put forward evidence that it had made unsuccessful attempts to re-let the premises. This was not the case in Gigi's situation, and Gigi had no expert evidence from a real estate agent as to the market value of the lease or the likely time that might be required to find an alternative tenant.
The Court was not satisfied that Gigi had established any special circumstances to warrant a departure from what Gigi itself accepted was the ordinary basis on which damages for loss of bargain are assessed.
In the absence of evidence as to any difficulties the landlord may have had in re-leasing the premises to an appropriate licensee, the Court said it was simply not known whether the landlord had suffered any loss at all as a result of the tenant's breach, as opposed to loss as a consequence of its own decision to carry on the hotel business itself.
This case serves as a reminder to landlords who intend to make a claim for loss of bargain damages upon termination of a lease that they should make appropriate and reasonable attempts to re-let the premises. Only if the premises cannot be re-let, or where the premises are re-let for an amount less than the amount stipulated in the terminated lease, is the landlord entitled to loss of bargain damages.
Also, if a landlord intends to argue that special circumstances exist for departing from the ordinary measure of damages, the landlord will need to demonstrate compelling evidence of the basis on which those special circumstances exist.
This article is one of a series of articles which we intend publishing over the next few months on breaches of lease and damages. The next article will discuss breach of make good obligations.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.